CRAT Attack.

• Author: Packard, Pamela
• Position: Charitable remainder trusts

A charitable remainder trust (CRT) may allow a taxpayer to obtain substantial tax benefits. The taxpayer can retain an income stream and receive an income and gift tax charitable deduction for the remainder interest. A CRT can also help to shelter gain on appreciated assets sold after contribution to the CRT. Although gain is realized by the CRT, it is taxable only to the income beneficiary as distributed. If the interest in the trust is retained for life, the assets remaining in the CRT at death are deductible for estate tax purposes.

A CRT must make a minimum annual distribution of at least five percent of the fair market value (FMV) of the trust assets for either the lifetime of an individual(s) or a term of years not to exceed 20. No distributions are permitted to any other individual, but a qualifying charity may in certain circumstances also receive income. Another individual (or individuals) can receive an interest for a term of years or for life following the first interest, but the second beneficiary must agree to pay any estate taxes due on the first beneficiary's death on account of the successor interest. After the term of years or on the death of the measuring individual, the remainder interest (the present value of which must be at least 10% of the initial FMV of assets on funding) must pass to a qualifying charity. The trust must operate according to these rules from inception.

The Tax Court recently disqualified a trust as a charitable remainder annuity trust (CRAT) and denied an estate tax charitable deduction for the value remaining in the CRAT at death. In Estate of Atkinson, 115 TC 26 (2001), the annuity payments required by the trust instrument were not actually paid to the donor. The trustee recognized that the payments were due the decedent, but they were never actually paid to her and no liability was ever accrued on the trust's books for the payments. The amounts due the decedent were, however, included as an asset of her estate.

The trust also violated the rule regarding the payment of estate taxes. Following the decedent's death...